Raising funds? These are some of the choices before you
There are several funding options emerging in India and entrepreneurs must gear up to raise funding from alternative sources to meet their requirements.
We are witnessing the formalisation of the economy post demonetisation, and there is a certain level of transparency that has come in with the introduction of GST laws as well as other reforms. This change will only further help MSMEs to access funds from external sources rather than depending on normal banking debt finance which in recent times, has slowed down due to high NPA levels.
There are various state and central institutions who also offer financing methods. However, this article focuses on highlighting the non-traditional methods. The IFCs report released in November 2018 mentions a huge gap in the equity needs of mainly in and mature stage enterprises compared to early stage or growth stage MSMEs.
They estimate the overall financing demand of MSMEs in terms of debt to be at approximately Rs 6,931 thousand crore while the equity demand is around Rs 1,842 thousand crore. This gap in numbers only goes on to highlight the sheer lack as well as demand in good financing options.
There are several funding options emerging in India and entrepreneurs must gear up to raise funding from alternative sources to meet their requirements. Some of the sources available for exploration are as follows:
Equity – risk capital
Almost 70 per cent of equity funding in MSMEs get done in early-stage enterprises though their business models are yet to emerge and prove successful. This is because of investors’ appetite for break-through technologies and growth prospects with high-return expectations. Whereas, in mature enterprises, the investors’ outlook is less promising as they think the growth would be a constraint.
Venture Capital/Private Equity: Venture Capitalists and Private Equity funds provide financial assistance primarily by way of equity or equity-linked capital investment. They also endeavour to provide mentoring support and other value addition to enable funded companies to achieve rapid growth as well as maintain their competitive edge in domestic & international markets. Some of the key players include SIDBI Venture Capital, Accel India Venture Fund, IFCI Venture Fund, Helion, SEAF, BTS among others.
The challenges in getting equity are the lengthy and cumbersome processes, sector-specific, reluctance to cede control, mismatch in valuation expectations and most importantly – the lack of capacity to absorb the capital.
SME exchanges: Recently few SMEs have successfully accessed the platform and raised equity from the public market after reaching a certain level of revenue. In the Bombay Stock Exchange (BSE) over 290 companies have raised equity. However, going forward, the MSMEs must gear up for strict compliances.
Venture Debt: Venture debt helps MSMEs to accelerate growth until there is a need for long term equity. Venture debt is normally structured as a term loan, and tenure as well as repayment schedules, are customised to the requirements of the MSME. The normal tenure is between six months up to three years, but the interest cost ranges around 18 to 24 per cent, as these debts are unsecured. Some of the venture debt providers include Intellegrow, Trifecta Capital, Unicorn India Ventures among others.
Factoring: It is a form of receivables finance whereby the company sells or assigns its accounts receivables (i.e. invoices) to a finance company (a factor) at a discount in exchange for immediate money with which to finance continued business. This helps in liquidity to manage working capital requirements. However, the challenge lies in obtaining the validation of customers by the factoring agencies. Hence, it becomes important to finance only reliable and trustworthy customers.
Supply Chain Finance: Supply chain finance can prove to be another route to facilitate SMEs’ access to enhanced working capital from bank and non-bank sources. This mode of financing enables businesses from SME suppliers up to large OEMs to receive short-term credit against the volume supplied during the payment receivable period. Hence, it is important to ensure supplies are regular, in order to be a favoured entity to receive the financing.
Crowdfunding: We are seeing the emergence of peer-to-peer lending through online platforms for short-term loans without the involvement of formal institutions. It basically brings individual borrowers and lenders on a platform for loan transactions. There are some 30 P2P platforms in India, with many of them in the micro lending space. Some examples include, Faircent, i2i, among others.
Though various lending avenues are available, it is important that the requirements are understood and there is a research conducted before seeking out the funds. Basically, the business seeking funding should be able to withstand the burden of interest and the timely repayment of capital. It would be worthwhile to engage a professional who would help evaluate the various financing opportunities, before the final decisions are taken.
(The writer is the Chief Investment Officer, IndiaNivesh Renaissance Fund)